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Bright outlook described for world dairy economy

Dec. 9, 2013 | 0 comments

WASHINGTON, DC

The outlook for both milk production and dairy market demand around the world looks quite good for the next year, two United States Dairy Export Council executives indicated during the 7th annual Global Dairy Outlook webinar sponsored by Dairy Foods magazine.

According to Alan Levitt, the council's vice-president for communications, the underlying question at the moment is when "the tipping point" between milk production around the world and a pent-up demand for dairy products will arrive. At that point, a buyer's market would set in, he indicated.

Levitt, who has been a dairy market observer and analyst for 25 years, expects a seller's market to prevail during most of 2014 because it is likely to take about six months for milk production to fill the pipeline for dairy product demand. He doesn't look for more than about a five percent overall change in market prices during the coming year after prices rose by about 10 percent for dry whey and up to 40 percent for milk powders during the past year.

Recent background

A sharp downturn of about 25 percent in New Zealand's milk production during its late summer season drought in the early months of 2013 was coupled with a minimum of a six percent drop in China's milk production during the first half of 2013 — the equivalent of 10,000 tons of whole milk powder per month — and smaller percentage cutbacks in both the Europe Union and South America, Levitt observed.

This set the stage for a higher volume export market and the higher prices — in large part because China is the world's largest milk powder importer and had been depending on New Zealand for a major portion of its supplies, Levitt pointed out. For the latest reporting period, China increased its imports of whole milk powder by 35 percent, skim milk powder by 24 percent, and dry whey by 22 percent, he indicated.

In addition, Russia's dip of four percent in milk production through September led to a 16 percent jump in dairy imports, most of which were cheese and butter, Levitt noted. Serving to offset those increases, in part due to sensitivity to high prices, were dairy product import reductions this year of 20 percent by Egypt, 11 percent by Algeria, and a smaller percentage by Venezuela, he reported.

Windfall for U.S.

With its one to two percent milk production increase for 2013, the United States was able to build its share of the world's dairy export market to 20 percent, up by four percentage points, during the first nine months of the year while also sharing in the overall price increase that boosted the value of the exports by 29 percent, Levitt indicated.

The U.S. had a good supply of non-fat dry milk and skim milk powder and also had 16 percent, up by 1.5 percentage point, of the world's cheese export market during that time, he pointed out.

Belarus enjoyed a 29-percent increase in dairy product exports, mainly to neighboring Russia, Levitt continued. He also noted that India, which is the world's top milk-producing country and had formerly banned exports, became a dairy product exporter for the first time — something he doesn't expect to continue to happen regularly.

During the July 2012 through June 2013 year, world milk production was down by an average of 3.3 million tons per month from the previous 12 months, Levitt stated. He predicted an increase of 1.5-two percent or 4.5 million tons per month for the current period ending in June of 2014.

Recent developments

With much more favorable weather, New Zealand's milk production is up by 5.5 percent for the early months of its new major production season, Argentina is also having a boost in production, and the European Union is adding cows, helping to boost its milk output by a minimum of two percent with Ireland likely to exceed its quota, Levitt reported.

Although Australia's milk production for the new year is down by two percent because of a series of droughts, overall world milk production is on a monthly increase of 400,000 to 500,000 metric tons compared to a year earlier, Levitt stated. He expects the United States to be a contributor to that increase in volume because of much improved operating margins in recent months.

Levitt cited recent analyses by University of Wisconsin-Madison dairy economists that indicate dairy farmers in the U.S. are enjoying their best operating margins since late 2007. This is due mainly to having corn prices drop toward $4 per bushel compared to an average of above $6 for the past three years, he said.

Levitt also noted that the portion of the U.S. affected by drought is the smallest since March of 2011.

World outlook

China will continue to be the driving force for the dairy export market, Levitt predicted. He based this on the combination of its domestic milk production problems, its willingness to pay for imported milk powders, and, in the longer term, the relaxation of its one child per family policy.

New Zealand is again supplying a larger portion of China's demand, starting with a 24-percent increase in its exports during October, Levitt stated. In combination with increases in dairy product supplies from elsewhere in the world, this means the U.S. will be facing more competition and is not likely to be able to increase exports in 2014, he predicted.

That product demand is strong was indicated by the Global Dairy Trade auction market on Dec. 3, Levitt observed. He noted that the winning bids increased by an average of four percent and suggested that this market has proven to be accurate in setting a market tone and price direction.

Economic indicators

In his remarks, the dairy export council's executive vice-president Marc Beck cited the prospects for economic growth of one percent in the European Union, a couple of percent points in some Southeast Asia and Middle East countries, 2.6 percent in the United States, and between seven and eight percent in China for the coming year. He also mentioned a moderating of and a possible decline in oil prices.

For whole milk powder, Beck expected a minimum structural gap of 84,000 metric tons in total by mid-2016 with a possible doubling or quadrupling of that number if New Zealand is short on supply and China has a greater demand. For skim milk powder, he mentioned a likely deficit of 20,000 metric tons, and possibly up to 150,000 or even 270,000 metric tons by early 2016, depending on the demands by Mexico and China.

In the cheese export market extending to mid-2016, Beck projects a minimum supply gap of 10,000 metric tons to much as 110,000 metric tons. He identified Russia and South Korea as two of the leading importers of cheese during the next two years and indicated that the U.S. and the European Union could cover the demands for cheese while the U.S. could also help with the milk powders except for whole milk powder.

Demand for butterfat by Russia, Saudi Arabia, and China could prompt some suppliers to shift production to satisfy that market, Beck remarked. He expects a minimum gap between supply and demand of 75,000 metric tons within the next two-plus years.

Beck foresees a milk production flush in the northern hemisphere during the early months of 2014, creating the possibility of a buyer's market as a result. Dairy manufacturers, particularly in the U.S., will have to watch if the domestic sale of cheese or the export of milk powders provides better returns and to notice how the difference between high-value and price-conscious buyers would affect their bottom line, he stated.

Question session

To questions posed by a few of the 950 webinar registrants in 60 countries, Beck pointed out that milk production increases in the European Union are occurring in the north while there are cutbacks in the south and southeast.

He also said the U.S. has a good export opportunity for whole milk powder along with a possibility of attracting buyers who can only afford lower than prevailing world prices for some dairy products — both of which could spur new processing investments in this country.

Levitt predicts a firm market for natural American-type cheeses along with solid foodservice sector demand and a greater appetite for pizza in much of the world. Beck expects a "resilient and strong" demand for whey proteins and a cutback in the production of sweet whey in favor of fractionated whey proteins.

To a question about the finding of new export markets, Levitt pointed out that some multi-national dairy firms have "put down flags" at a few places in Africa. He cautioned, however, that product prices are not likely to be affordable in many countries and suggested that, at least in short term, there is not likely to be much of a geographical shift in the dairy export markets.

Beck expects that some tension could build in the U.S. dairy sector on deciding between cheese production and extra powder production if the export price for the latter remains strong. He suggested, however, that increases in the U.S. milk production would be sufficient to support the production of more milk powders without cutting back on cheese production.

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